European Midday Briefing: Stocks Struggle in Lackluster Opening Session

MARKET WRAPS

Stocks:

Shares in Europe opened lower on Wednesday despite U.S. retail sales data and remarks from Federal Reserve speakers reviving hopes for interest-rate cuts sooner rather than later.

"Fed policymakers appear to be creeping closer to bringing in a rate cut this year but are warning that patience will still be required," Hargreaves Lansdown said.

The message from policymakers on Tuesday was that "if conditions continue to ease as expected, an easing of policy later this year would be appropriate."

French stocks continued to weaken.

"The CAC once again finds itself at the bottom of the pile, with Goldman Sachs warning that a Le Pen victory would see the country's debt burden swell to the highest level since 1950," Scope Markets said.

The Bank of England announces its next interest-rate decision on Thursday. with investors pushing back expectations of a cut following a higher-than-expected services inflation print.

Annual headline inflation hit the BOE's 2% target for the first time in nearly three years, but components of underlying price pressures were hotter, data showed.

Deutsche Bank said the BOE will almost certainly hold rates at its meeting on Thursday. But with services inflation only nudging down to 5.7% in May from 5.9% in April, the bar for an August rate cut is raised.

Stocks to Watch

Hargreaves Lansdown could see a counter offer materialize as the improved bid price of 1,140 pence a share from the CVC-backed private equity consortium is cheap, Jefferies said. It lowered its rating on the stock to hold from buy but raised its target price to 1,140 pence from 1,035 pence.

Other analysts were surprised supported the improved offer while others said the new conditions of the bid increased the probability of success.

Hargreaves Lansdown shares slipped in London trading but are up 53% in the year to date.

The sensitivity of Italian banks' capital to the 10-Year BTP-Bund yield spread has declined materially after the selloff in lenders' shares following the European elections compared with previous crises, Jefferies said.

It noted that the impact on Italian banks' CET1 ratios of a 20 basis-point spread widening is moderate, based on average sensitivity, at 2 basis points on average.

Forex:

Political uncertainty surrounding the French legislative election has the potential to push the euro down to $1.05 against the dollar, but bigger falls than that would require a possibility of France exiting the euro or the European Union entirely, UBS said.

This prospect looks unlikely given that Marine Le Pen's National Rally party no longer wishes to leave the EU or the eurozone while Emmanuel Macron would continue to hold constitutional power over foreign policy and defense, UBS added.

MUFG said evidence of a slowing U.S. economy, as shown by data revealing retail sales barely rose in May, could hold back the dollar.

U.S. rate-cut expectations picked up after the data, with money markets showing 140 basis points of rate cuts priced in by the end of next year.

"This level of easing by end-2025 is the most since March and we believe this will likely curtail the strength of the dollar." If nonfarm payrolls data show "a clearer sign of jobs growth slowdown" then a rate cut in September would look more likely, MUFG said.

Sterling edged higher against both the dollar and the euro after the U.K inflation data.

"This is not necessarily job done and victory declared for the Bank of England," Quilter Investors said.

Sticky core inflation seems likely to continue giving the BOE pause for thought, it added.

Bonds:

Eurozone government bond yields were slightly lower in early trade, but French OAT yields rose due to uncertainty in the run-up to snap elections in France.

The fall in core eurozone bond yields was helped by data showing U.K. headline inflation returned to the Bank of England's 2% target in May.

Demand at the 20-year Treasury auction on Tuesday signals good demand for duration, a measure of how sensitive a bond is to interest-rate changes, ING said.

"Not exactly a key reference point on the curve, but still this continues a decent run of taking down big auction sizes, and shows there is demand for duration."

Flows data tracked by ING tell the same story. That said, once the Federal Reserve starts to deliver interest-rate cuts, bond markets will begin to focus a bit more on the weight of supply, acting to steepen the yield curve from both end, ING added.

Energy:

Oil prices remained broadly stable on expectations of a tighter market in the summer, as investors weigh concerns over supply disruption risks and reports of a surprise build in U.S. inventories.

Sentiment was being supported by prospects of tightening supplies over the third quarter, as rising demand during the travel season and the rollover of OPEC+ cuts are expected to keep the market undersupplied.

Both benchmarks gained more than 1% on Tuesday after a Ukrainian drone attack sparked a large fire at an oil terminal in Southern Russia. Also, reports citing figures from the API said U.S. crude inventories rose by 2.26 million barrels last week, a negative sign about demand in the top consumer ahead of official data later on Wednesday.

Metals:

Gold futures were flat, with few drivers to give it direction on the U.S. Juneteenth holiday.

Longer-term, gold should provide strong protection against the possibility of high inflation from losses in central bank credibility and macroeconomic upsets, Goldman Sachs said.

"We see value in long gold positions as an inflation hedge from geopolitical shocks including tariffs, Fed subordination risk, and debt fears."

StoneX Intelligence said gold was attempting to consolidate above $2,300 but remained vulnerable to unexpected market developments.

Investors have been weighing the news cycle, with the PBOC reporting no change in gold reserves in May and the Fed likely only cutting rates once this year.

Gold ETFs have been cautiously positive, but the gold commodity exchange has shown mixed trading sentiment, StoneX said. Worries about potential geopolitical risks and fresh sanctions on Chinese products will likely support prices, it added.

Copper

Incremental copper demand growth forecast from data centers might look small on an annual basis, but data centers could require nearly 2.9 million metric tons of copper between 2024 and 2030, Jefferies said.

It estimates incremental global copper demand in data centers will increase from 241,000 tons or 0.9% of global demand in 2023 to at least 463,000 tons or 1.4% of global demand by 2030, based on what it describes as conservative assumptions.

Iron Ore

China's weak housing market continues to weigh on the outlook for iron ore , with risks skewed to the downside for prices in FY 2025, Wilsons Advisory said, whose portfolio retains an underweight exposure. It reckons iron ore will find cost support around $80-$90/metric ton.

Steel

A 2.7% on-year lift in China's crude steel output for May makes sense given the improvement in steel mill margins during that period, Commonwealth Bank of Australia said. But with steelmaking margins there negative once again, "it's hard to remain optimistic that China's steel output will grow in June like it did in May."

Miners

Artificial intelligence tools are playing an increasing role in exploration efforts by miners seeking to find new mineral deposits, Jefferies said. It said that while it is early days, highlighting some skepticism among geologists over the way AI models can be used right now, "conversations with corporates suggest demand will continue to grow."

EMEA HEADLINES

Super-Star Sneaker Maker Golden Goose Postpones IPO Amid Market Turmoil

Italian fashion company Golden Goose, the maker of Super-Star sneakers worn by celebrities including Taylor Swift, postponed its initial public offering, citing European market volatility.

The decision by the company, which was slated to start trading in Milan later this week with a valuation of up to $2 billion, marks a setback for a renascent European IPO market that had seen activity pick up in recent months.

Vodafone to Raise $2 Billion Via Stake Sale in Indian Telecom Tower Company

Vodafone Group plans to raise as much as $1.98 billion by selling the bulk of its stake in an Indian telecom tower operator, according to a term sheet seen by The Wall Street Journal.

The latest term sheet showed an increased deal size, with the U.K. telecom operator now planning to sell 484.68 million shares, representing a nearly 18% stake in Indus Towers.

GLOBAL NEWS

Bond Trading by China's PBOC Wouldn't Be Quantitative Easing, Gov. Says

Trading in bonds by China's central bank wouldn't be a form of massive monetary easing, according to its governor, as he responded to speculation that Beijing is eyeing the unconventional policy tool to prop up the economy.

The People's Bank of China and the finance ministry are studying ways to include treasury bond trading in its policy tool kit, said PBOC governor Pan Gongsheng in a finance forum on Wednesday. He rejected the notion that the practice would be equivalent to quantitative easing, when monetary authorities load up on assets like government bonds to push down yields after exhausting more traditional policy tools.

Putin Sees Long Partnership With North Korea as He Gets Lavish Welcome

Russian President Vladimir Putin vowed to strike an agreement with North Korean leader Kim Jong Un that would define a long-term partnership between their nations, as the leaders used a summit in Pyongyang to deepen ties and flash defiance at the West.

Putin received a lavish welcome as he arrived in North Korea for his first visit to the country in nearly a quarter-century. Standing under a banner heralding the two nations' "everlasting friendship," Kim greeted Putin with a hug at Pyongyang International Airport in the early hours of Wednesday.

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June 19, 2024 06:01 ET (10:01 GMT)

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